With the passage of the 2018 U.S. Farm Bill, industrial hemp (defined as cannabis with less than 0.3% THC) was removed as a Schedule 1 drug from the Controlled Substances Act (CSA) and is no longer considered a federally-illegal controlled substance.
Not only is this a major win for American farmers, who are now legally allowed to grow industrial hemp here in the U.S., but this is a major win for businesses who operate in this space with respect to their tax liabilities.
Businesses involved in the trafficking of a controlled substance (i.e. cannabis and previously hemp and hemp-derived CBD products), are not allowed to take deductions or credits at the federal (and in most cases state) level, other than expenses related to the cost of goods sold (U.S. Code Section 280E).
Since the passage of the 2018 Farm Bill, hemp and hemp-derived product-oriented businesses are now eligible to take advantage of federal and state (if applicable) Research and Development (R&D) Tax Credits, in addition to other federal and state tax credits and deductions.
This is a huge boon for all hemp businesses that were previously paying astronomical income taxes because they could not deduct selling, general, and administrative (SG&A) expenses that they incurred during the normal business lifecycle.
We are witnessing the hemp and CBD industries emerge as serious players in the global market. Like any emerging industry, research and development is likely to be a new company’s largest expenditure. Thankfully, hemp-derived businesses will now be able to recoup expenses related to the development of new hemp/CBD products, processes, software, technology, inventions, patents, or new formulas through the R&D tax credit.
Originally enacted in 1981 under the Economic Recovery Tax Act (ERTA), the R&D Tax Credit has expired eight times, been extended 15 times, and was made a permanent federal tax incentive in 2015 under the Protecting Americans from Tax Hikes Act (PATH Act).
To qualify for R&D tax credits, a business activity must satisfy all four parts of the “Four-Part Test”:
OK, so you think your business activities satisfy all the criteria in the Four-Part Test. You are now probably wondering: “How are R&D tax credits generated?”
After identifying which projects or business components qualify, the next step is determining which expenses you can apply towards the credit.
Once the qualified research expenses (QREs) have been identified, roughly 10% of those QREs generate a federal R&D tax credit, which dollar-for-dollar reduces income, or payroll tax, liabilities. Whereas each state has its own version of the R&D tax credit, some states follow the federal methods and can generate an additional 10% state credit. However, state R&D tax credits can vary from 3% - 12% of QREs, so it’s important to include available state credits to maximize your company’s benefits.
Some examples of qualified research activities (QRAs) that hemp farmers, manufacturers, processors, distributors, entrepreneurs, and innovators are performing include any of the following:
As you can see, there are many activities that qualify for the R&D tax credit in the hemp and CBD industries for the 2019 tax year and beyond.
If you, or a business you know, is involved with a hemp or hemp-derived CBD/product business, visit our FAQs page to learn more about the R&D tax credit. Or better yet, contact a member of the HempTax Credit team today to see if your business activities qualify and how much you could be entitled to.
At HempTax, we specialize in working with hemp and CBD companies to maximize R&D credits and make sure your company isn’t leaving any money on the table.
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